Property tax reform a mixed bag for Pa. schools, businesses

Bills to eliminate property taxes to fund schools would create a massive business tax cut.

October 15, 2013|By Steve Esack, Call Harrisburg Bureau

HARRISBURG — Pennsylvania's 500 school districts would lose $112 million next school year and up to $2.6 billion in five years if state lawmakers strip school boards of their ability to set and issue local property taxes and replace the arrangement with a statewide taxing system that relies on higher sales and income taxes and more taxable goods.

That's according to a report by the Legislature's Independent Fiscal Office.

Still, Sen. David Argall, R-Schuylkill, the prime sponsor of a Senate bill on the topic, said the state's 1800s property tax system needs to be eliminated to stop school boards from raising taxes for daily operations and long-term debt.

"What I continue to hear is some school districts do a good job of managing their dollars and some spend like drunken sailors," Argall said after Tuesday's Senate Finance Committee hearing on his proposal.

Similar Senate and House bills on the topic are far from becoming law but have the support of plenty of homeowners, including Steve Trainer of Towamensing Township, Carbon County, who's fearful he will one day lose his residence.

"As a homeowner I want to see a total elimination of school property taxes because I don't want to fret over having someone come in and evict me from my home," Trainer said. "Many seniors face this."

Current property tax overhaul bills also would create a massive business tax cut — and that could push the constitutional onus of funding public schools further onto individuals.

The bills would not raise other business taxes to make up for $3.2 billion in lost business property tax revenues, the Independent Fiscal Office said in a 2012 report.

School districts collected roughly 70 percent of the $11 billion in property taxes from homeowners in 2011-12, the IFO report states.

The bills call for the state sales tax to go from 6 percent to 7 percent across the state (higher in Philadelphia and Pittsburgh). The personal income tax rate would go from about 3.1 percent to about 4.3 percent.

The bills also would for the first time tax a host of new items, including: certain food items, over-the-counter-prescription drugs, clothing over $50, sports and amusement tickets, newspapers and magazines, home health care and some nursing services.

If homeowners no longer paid property taxes, the IFO reports state, they would have more disposable income to spend. However, disposable income would be reduced by higher federal income taxes, because homeowners could no longer deduct a portion of their property taxes on federal tax forms.

In addition, a downturn in the economy could make individuals reluctant to spend money, which is what occurred when the housing bubble burst and the Great Recession hit in 2007-08, the report states.

Despite those caveats, the higher sales tax would generate $5.2 billion for a newly created Education Stabilization Fund operated by the Department of Education. Of that total, $4.6 billion would come from consumers, and $587 million from businesses, the IFO said.

The increased revenue from higher sales and income taxes, however, still is not enough to cover the loss school districts would experience if they were no longer able to raise property taxes, according to a new IFO report issued this month and the subject of Tuesday's Senate hearing.

During the hearing, IFO Executive Director Matthew Knittel told lawmakers that the Education Stabilization Fund would collect $13 billion in 2018-19. But not all of that money is given back to school districts, he said.

The state would keep about 13 percent of it in 2018-19, creating a $2.6 billion shortfall for school districts, Knittel said. Even if the law was amended to fix that loophole, Knittel said, the loss for school districts would be $1.1 billion.

That funding disparity is the main reason the bills are far from becoming law despite a letter Argall sent to school districts in his district, touting 24 senators who have signed on as co-sponsors.

On Tuesday, Argall admitted that the bills need to be amended to fix the deficiencies the IFO outlined. Hopefully then, he said, he'll get two more senators to sign on as co-sponsors to get the Finance Committee and full Senate to vote on the bills.

The school funding tax shift is already a dead issue in the House, however. Last week, the Republican-led House handily rejected a similar taxing proposal that was tied to another bill.

Still, the bills are drawing a range of views across the Lehigh Valley. The Bangor Area School District has endorsed Argall's bill, while the Northampton Area School Board is fearful.

During Monday's meeting, Northampton Area business manager Terry Leh said the bill could preclude the district from taking out more bonds to finish its $80 million middle school construction project.

Director Michael Baird said he feared the loss of local control to state lawmakers in the day-to-day operations.

"How will you be assured that Harrisburg won't stick its nose in everything that we do?" he asked.

The Senate Finance Committee has not scheduled another hearing on Argall's bill.